Steel mills across Europe have been criticized for not addressing overcapacity since the financial crisis but if you think closing steel mills in the U.S. is a problem, with states lobbying mills to maintain operations, it is nothing compared to the 28 nation states of the European Union, for whom the continued existence of a national steel industry — each country generally has only one or two champions — is a matter of political survival for many governments.
Port Talbot in South Wales, U.K., could close if Tata Steel can’t strike a deal and Brexit could make it harder to get one done. Source: Adobe Stock/Petert2
So, for transnational steel producers to moot the possible rationalization of a mill in one country is to invite howls of protest and a political storm. Plus, governments sometimes offer financial support, although, technically, that is against E.U. rules, but ways are often found.
Steel Deals Now in Peril
Tata Steel’s proposed closure or sale of it’s U.K. operations has stuttered along this year with long products being successfully sold to various parties and the major blast furnaces and flat-rolled operations at Port Talbot, South Wales, being circled by a couple of bidders. Read more
U.S. steel prices have had a spectacular run this year, mostly attributable to trade cases as the U.S. steel industry has turned into a virtual island, creating a divergence between domestic and global steel prices. That was the case during the first half of the year but nothing guarantees that this trend will continue in the longer term.
Prices In China Fall
In the first half of the year, prices for hot-rolled coil in U.S. have risen over 70%. Although trade cases are what helped U.S. steel prices the most, the domestic rally was also supported by rising steel prices in China.
Investors’ sentiment in the steel industry improved this year as China’s stimulus measures made an impact on steel demand. Also, the world’s biggest steel producer vowed to cut production capacity by 45 million metric tons this year and 100-150 mmt over the next three to five years. This combination of demand and supply measures boosted sentiment in the steel industry and prices in China increased.
But as time goes on, China is failing to meet its promises. China produced more steel than the rest of the world combined in May. According to the World Steel Association, China produced 70.5 mmt of crude steel products in May, up 1.8% from the levels of a year earlier and just shy of the record 70.65 mmt level hit in March 2016.
On top of that, demand doesn’t seem to be offsetting rising production. Exports keep rising. In May, China exported 9.4 mmt of steel, a 2.3% increase compared with a year earlier. For the first five months of the year, exports are up 6.4%. Given these numbers, 2016 could turn out as another record year for Chinese steel exports.
The continued growth of these figures worries steel investors. That is being reflected in the price action. Hot-rolled coil prices in China have fallen more than 20% from their April peak and the decline could be even more severe if Beijing doesn’t come through with more mini-stimulus in the second half.
US Steel Prices Flatten
The decline seen in Chinese steel prices haven’t hit domestic prices, at least not yet, but could be pointing to some domestic price turbulence in the second half.
Indeed, over the past few weeks the rally in U.S. steel prices has lost some steam, keeping domestic steel prices pretty much flat in June.
Falling U.S. steel imports caused prices to rally this year. However, the rate of decline last month was the lowest in 10 months. In fact, absolute import levels have increased on a monthly basis since February. An increase in steel imports later this year serves as one of the biggest risks facing U.S. steelmakers, considering the current price gap between domestic and international prices.
Should service centers come back into the market and restock with imports, domestic mills may see some price pressure. If prices in China continue to decline, this is something that steel buyers should watch.
Finally, steel stock values have also lost traction. Domestic steel prices directly impact the stock prices of steel producers in the U.S. Since May, we have witnessed investors’ enthusiasm for these companies vanish. This is an early sign that domestic steel prices could suffer a correction.
The British government’s offer of financial aid to Tata Steel U.K. and to potential buyers of its assets is still on the table — including its massive steelworks in Port Talbot, South Wales — business minister Anna Soubry told Reuters on Wednesday, despite Britain’s vote last month to leave the European Union.
Seeking to avoid thousands of job losses, the government had offered millions of pounds in support for the company and its potential buyers. It also pledged to take a 25% equity stake in Tata’s U.K. branch and reform the British Steel Pension Scheme (BSPS).
Gold Hits a Two-Year High
Gold increased for a seventh straight session after touching its highest point in more than two years in the previous session as investors are still seeking safe-haven assets even as stock markets are tentatively bouncing back after the U.K.’s Brexit vote last month.
Construction spending during May reached a seasonally adjusted annual rate of $1,143.3 billion, 0.8% below the revised April estimate of $1,152.4 billion, but 2.8% above the May 2015 estimate of $1,112.2 billion, according to data from the U.S. Census Bureau. Construction spending in the first five months of this year, construction totaled $438.5 billion, which is 8.2% higher than the $405.4 billion for the same period in 2015.
It’s difficult to quantify the lack of spending increases in what outwardly looks like a robust U.S. construction sector.
Spending Struggles to Stand Pat
Residential construction was at a seasonally adjusted annual rate of $451.9 billion in May, virtually unchanged from the revised April estimate of $451.7 billion, while nonresidential construction was at a seasonally adjusted annual rate of $407.4 billion in May, a mere 0.7% dip from the revised April estimate of $410.1 billion.
Ken Simonson, chief economist at Associated General Contractors of America, a construction industry trade group, noted that the latest data affirms complaints that contractors are having an increasingly hard time finding skilled workers to hire.
“Mild winter weather in many regions early in 2016, followed by extreme rains in some locations in May, has probably distorted monthly spending patterns but shouldn’t mask the robust widespread growth in demand for construction so far this year,” Simonson said. “It appears there will be plenty of activity in the remainder of 2016 — if contractors can find the workers they need.”
There is, however, good news from abroad. In China, the Caixin/Markit services purchasing managers’ index for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.
Beijing has fast-tracked planned infrastructure spending this year to boost growth, and a strong run-up in housing prices as buying restrictions were loosened helped turn around a slowdown in property development. Like many of our sub-indexes this month, it will be interesting to see what effect the U.K.’s vote to leave the European Union has on construction prices when markets have had a month to settle.
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The Industrial Metals ETF hits an 11-month high. Source: Stockcharts.com
Our historical analysis shows that a metal has far greater upside potential when the overall commodities market is in bullish mode, while its chances of going down increase in a falling commodities market. Although nickel’s fundamentals don’t look that bullish, the metal is definitely getting a boost as more investors jump into the industrial metal complex. In the chart above we see how base metals are on the rise since January.
Another factor helping nickel prices are expectations of lower nickel pig-iron exports from the Philippines. Ore producers in the Philippines warned earlier this year that they would cut production due to low prices. So far, Chinese imports of Philippine ore fell by 27% in the first five months of the year. Read more
Although sales are back on pace to break last year’s record, there are still signs that the auto sector’s momentum might finally be flagging. Sales are not increasing over the previous year’s levels by as much as they were at this time in 2015.
After six straight years of growth and record sales of 17.5 million last year, U.S. sales are beginning to plateau. In the first six months of last year, for example, sales were up 4%, or more than double the pace of this year. Low gas prices, low interest rates, enticing new vehicles and strong consumer confidence are keeping sales high.
Our Automotive MMI showed a 3% increase based mostly on increasing demand from automakers. General Motors Co. said its sales dropped 2% in June to 255,210, but Ford Motor Co.’s sales rose 6% to 240,109. Sales of its F-Series pickup truck, the nation’s best-selling vehicle, jumped 29% to nearly 71,000 vehicles, or more than one every minute. Fiat Chrysler said its June sales rose 7% to 197,073.
US Steel Separated From Global Prices
Backed by anti-dumping and countervailing duties, U.S. steel prices continue to enjoy price increases not available elsewhere in the global market. It will be interesting to see if automakers can continue to offer the level of discounts that consumers have grown accustomed as their own supply chain prices go up.
Automakers are getting a sales boost, however, from oil prices which — while they have gone up this year — are still hovering around $50 a barrel. Consumers are still being incentivized to buy new vehicles by gas prices around $2.00 a gallon in much of the nation.
Chinese Sales Soaring, Too
Overseas, growth in car sales in China reached a five-month high in May. Automakers delivered a total of 1.79 million passenger vehicles — sedans, sport-utility vehicles and minivans — to dealers in the world’s largest auto market last month, up 11% from a year earlier, the government-backed China Association of Automobile Manufacturers said on Monday.
Automotive metals are still in the sweet spot they’ve enjoyed for much of the year with low oil prices, strong demand for new vehicles and lighter, stronger metals available to create efficient, desirable cars, trucks and SUVs. Investors have bullishly moved into precious metals due to economic instability in world markets recently but those price increases for catalysts such as platinum and palladium have not yet been felt by automakers. While the auto market is still not growing as fast as it did last year, things could be far, far worse.
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There are indications that antitrust rules may have been violated, and the raids were conducted to investigate the facts, Kay Weidner, spokesman for the Federal Cartel Office, said in an e-mailed statement to Bloomberg News on Tuesday. He declined to identify any company.
BMW, VW, Daimler, Bosch and ZF Friedrichshafen AG confirmed that they were raided and said they are supporting the investigations.
Automakers are one the major pillars of the German economy, and steel is a key component for auto companies.
US Shale Firms Increased Hedging as Oil Prices Fell
The international mining and metals sectors didn’t take a break for Independence Day. Rio Tinto Group has made its first moves under its new CEO and India is reconsidering its steel tariffs.
Jacques Shelves Rio Iron Ore Project
Rio Tinto Group has shelved its $20 billion Simandou iron ore project in Guinea because of a sustained slump in prices, the company’s new CEO Jean-Sebastien Jacques said in an interview with The Times newspaper.
The world’s second biggest miner by market capitalization had been seeking financing for Simandou, even after a $1.1 billion writedown on the project in February. Last month the Anglo-Australian company submitted a feasibility study to the Guinean government.
But global oversupply of iron ore made the project inviable at this time, Jacques told The Times.
India is Reconsidering Steel Minimum Import Prices
Read all about the implications of Brexit and other recent developments for metals markets in our July Monthly Metal Buying Outlook.
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“For us, right now, the real exciting stuff is in the mixing of materials,” Charlie Carter, American Institute of Steel Construction vice president and chief structural engineer, told ENR. “Steel has always done that, of course. A big innovation in mixing materials that I see coming is the wood industry pushing cross-laminated timber.”
Steel Moment Resisting Frame with CLT infill wall. Illustration courtesy of Earthquake Spectra.
Putting wooden CLT panels into a steel moment resisting frame, then putting them both on a concrete topping, is becoming very competitive with a typical flat-plate concrete standard floor, according to ENR.
The hybrid system combines ductile behavior of the steel moment frame with lighter and stiffer CLT panels. Like many recent innovations in building materials, hybrid CLT/SMRF systems were driven by green building codes.
In major Canadian cities, to meet urban housing demand using renewable materials, tall wood-based buildings are increasingly considered. In 2009, the British Columbia Building Code was amended to increase light wood-frame buildings heights from four to six stories.
This article in the journal Earthquake Spectra further explains how the CLT/SMRF system can satisfy the seismic compliance requirements of building codes while still qualifying as a sustainable building material.